December 22nd, 2014 / Insight posted in The Sunday Times Business Doctor

Key figures to put into financial forecasts

AH writes: I am preparing a business plan to help me seek funding to expand my company. I need to include financial forecasts but I’m not sure how to create these. What should I include in such forecasts?

The financial forecasts translate into numbers what you have already said about your business, writes Jon Dawson, partner at Kingston Smith LLP. You need to show when you expect to generate income and when you will incur costs and, crucially, how this will impact on cash coming into the business or being paid out of it.

At the very least, your forecasts should include a profit and loss account, balance sheet and cashflow statement. The future period they cover will depend on your business, but around three years is common and you should separate the forecasts into financial years. You can easily find templates that you can adapt, rather than creating these from scratch.

It is important that you make your forecasts realistic. If they are too optimistic or not thought through, they might cast doubt on your ability to run the business and could affect your chances of raising funds.

You should also be clear about how you will use the funds that have been raised and what impact they will have on profitability and the ability to repay the funder.

You may also want to focus on specific areas in more detail, such as: expected sales volumes, monthly patterns, capacity, price changes, competition and economic factors. Being able to demonstrate an all round appreciation of how your business generates cash will certainly help to impress backers.

Once you have the forecasts, they can be used as a powerful tool in running your business. You can measure actual performance against expectations and adjust your forecasting to reflect the current situation or changing markets. You can also have a number of different forecasts to show “what-if” scenarios and, crucially, help you to manage any future cash deficits.